Introduction to Accounting - AAS1 - Essay Example

There is a significant relationship exist between revenue and expense. The company incurs expenses to generate revenue so, the matching principle states that all the expenses that were incurred in a period to generate revenue should be subtracted from the revenue of the same period for the purpose of computation of the net income (Nikolai, et al., 2010). Going Concern Concept Going concern is also a key concept accounting that assumes that the company will continue its operation for a foreseeable future.

This important assumption is made because the amount of time, the company will continue its business cannot be predicted (Carl, 2011). IAS 1 states that if the company has serious threats to going concern they must be adequately disclosed in the financial statements and if the management concludes that the entity is not going concern the financial statements should not be prepared on going concern assumption. Business Rates In the previous year the company paid total amount of ?9,600 on account of business rates, in the two equal installments of ?

4,800 each. Now if the rates for the bills are higher by 5% in the current year, the total amount of the bill will be ?10,080 (9,600*1.05) making it ?5,040 each installment. First installment has already been paid and the second installment is due in December 2012. The business is liable to pay this amount, so it should be recorded as current liability in the balance sheet and an equal amount of expense shall be recorded in the income statement according to the matching principle. Following journal entry will be required to record this transaction on accrual basis; Description Debit Credit Profit & Loss Account 5,040 Rates payable 5,040 Credit Sales If the credit sales are made, the transaction will be recorded on accrual.

The business is entitled to record the sales even if the payment will be relieved next year. In case of credit sale following entry is required. Description Debit Credit Account Receivable XXX Revenue XXX If 120 days credit is allowed there are certain chances that the business will be able to obtain more revenue. However, this is not good for the business to have that extended credit limits. In this situation it is reasonable to offer discounts to the customers to encourage them to make early payments.

With this discount policy the company will be able to generate more business as well as there are chances of quick recovery from the customers. Stock Valuation Stock is one of the most valuable assets of the business. Its value is determined with the guidelines provided by IAS 2 Inventories, which prescribes that the inventories should be measures at lower of cost or net realizable value (NRV) (IASB, 2011). In this case the original value of the stock was ?25,000 and due to the flood there was a major damage to it.

Now the company believes that it will be able to obtain only ?8,000 from the same stock items. The value of the inventory should be reduced to ?8,000 and a loss of ?17,000 should be charged to profit and loss account. Following journal entry shall record the effect of this incident; Description Debit Credit Profit & Loss Account 17,000 Inventories 17,000 Depreciation Depreciation is a method of allocating cost of the tangible long term asset over its useful life. IAS 16 Property, Plant & Equipments requires that every asset should be depreciated over its useful life, so depreciating every asset is essential in order to meet the requirement of the international accounting standards. IAS 16